By opening a franchise, you could enjoy the freedom of running your own business while benefiting from an existing structure, brand, and customer base. A franchise is an agreement between a franchisor—the original business owner—and a franchisee. The franchisor agrees to allow the franchisee to use the business name, model, trademark, structure, products, and operational methods in return for the franchise fees and ongoing royalties. Many franchises operate in highly competitive industries, like dining and retail. Franchise owners don’t have to worry about breaking into those markets. Instead, they can focus on delivering excellent service to their customers.
While opening a franchise can be lucrative, the startup costs are often significant. To start, you must pay franchise fees, attorneys and accountants, and operational expenses, and cover inventory and supplies. The right financing option could help you secure a franchise opportunity and start building a successful business.
Key considerations
- A franchise agreement between a franchisor and a franchisee allows the latter to use the business trademark in exchange for franchise fees and ongoing royalties.
- Opening a franchise comes with many expenses, from fees to real estate, equipment purchases, inventory, and more.
- Several types of business financing could help small business owners open a franchise.
How Franchises Work
Franchise contracts are often complex and may vary greatly depending on the size of the franchise and the length of the agreement. In most cases, the franchisee must pay up front to use the original company’s trademark, supportive resources like training and business guidance, and proprietary equipment. The franchisor receives a percentage of sales on an ongoing basis. This arrangement allows franchisees to benefit from the franchisor's established reputation and proven business practices, while the franchisor expands their market presence and revenue through the franchise network.
Because the franchising process is often complicated, many first-time franchisees pay for an attorney to navigate the nuances of the agreement and make sure the franchise meets all state requirements. Some professionals may also hire an accountant to clarify financial obligations and taxes.
Franchise Financing Options
While some small business owners use savings or equity funding to open a franchise, most rely at least partially on some form of financing. Prospective franchisees could choose from various loans and other financing options to help manage startup costs. The right tool for you depends on the amount you may need to borrow, your qualifications, and how quickly you need cash in hand, among other factors.
Small Business Administration Loans
The Small Business Administration gives lenders guarantees for a certain number of SBA loans, so the loans often have more relaxed credit requirements than other types of financing. Repayment terms for SBA loans could be as long as 25 years, so monthly installments tend to be affordable for new business owners. However, SBA loans typically have lengthy application processes, so they may not be the right choice if you need cash quickly.
Two types of SBA loans may help you finance a franchise:
- 7(a) Loan – Small business owners who need flexible funding may consider a 7(a) loan. This financing toolcan be used for many business expenses, including real estate purchases, repairs, equipment costs, supplies, and working capital. Entrepreneurs may borrow up to $5 million, which could cover multiple franchise expenses. To secure a 7(a) loan, you must either personally agree to repay the loan in full if the business fails t or provide a personal asset, like a home, as collateral.*
- 504 Loan – Like a 7(a) loan, a 504 loan could help you access large sums with a long repayment term. However, 504 loans are more limited than 7(a) loans. Funds could cover fixed assets, like equipment or real estate. Those assets become collateral, so you don’t have to put personal belongings on the line. Franchisees should remember that, while a 504 loan could cover some major startup expenses, it can’t be used to pay franchise fees.**
Business Lines of Credit
A business line of credit from a bank, online lender, or credit union works like a credit card. When a lender approves your application, you gain access to funds within a specific credit limit. You can borrow from the credit line as needed within that limit. You can regain access to the total amount as you repay your balance. A line of credit could make it easier to cover the unpredictable expenses of opening a franchise, like managing inventory or renovating the space. This flexibility may help you manage the initial costs of starting a franchise and any ongoing operational needs without the pressure of a lump-sum loan repayment schedule.
With a business line of credit, you pay interest only on the amount you spend. However, if you fall behind on payments, interest typically accumulates quickly, which could put your new franchise in a difficult position. A line of credit may be a good choice for an experienced small business owner with an established business credit history.
Business Term Loans
Business term loans from banks or online lenders could provide the amount you need to cover franchise startup costs with terms that make sense for your unique circumstances. A term loan is a lump sum that you repay in fixed installments over a set period. Lenders may offer short-term loans (up to two years), medium-term loans (two to five years), and long-term loans (five or more years). Longer loan terms typically have smaller payments. However, you pay less overall with shorter-term loans because interest has less time to build up.
You’re typically free to use a business term loan as you choose, whether you want to cover your franchise fees or operational costs. Business term loans from private or online lenders often have streamlined application processes, especially compared to SBA loans. They could be the right fit if you need a specific amount of money quickly.
How to Apply for Franchise Financing
Each lender has its own processes, but you can typically apply for financing by following these steps:
1. Check your qualifications
Most lenders assess potential borrowers based on the “five Cs of credit”: character, conditions, collateral, capital, and capacity. Before you apply for financing, consider how your business stacks up. You can do that by checking your business and personal credit scores, itemizing your assets, assessing your savings and cash, and determining how much you could invest in the business.
2. Gather necessary materials
Some lenders require more extensive documentation than others. Generally, it’s a good idea to prepare your business plan, financial statements, personal and business tax returns, franchise agreement, and any documentation you’ve received from the franchisor. If you’re working with an accountant, they may be able to help you identify the proper paperwork. With BHG Financial, our U.S.-based team offers concierge service. We'll gather the necessary documents for you to streamline the application process.
3. Submit your application and wait for a response
After you’ve gathered all the necessary materials and responded to the application questions, all you have left to do is wait for a response. Some lenders may take weeks to review your application, while others may make a decision within a day. If your application is approved, you’ll likely have another waiting period before the lender disburses funds into your account.
4. Receive funds and begin repaying
After receiving the lump-sum loan or access to a line of credit, you can apply the funds to your necessary expenses. Make sure you stay on top of your payments so that debt doesn’t stand in the way of your franchise’s success.
Power Your Franchise with a Startup Loan from BHG Financial
With a startup loan of up to $500,0001,2 from BHG Financial, you can begin your franchise venture with confidence. Our streamlined application process allows you to apply with minimal paperwork and receive a decision in as little as 24 hours.3 If approved, you may receive a lump sum in as few as three days.3 Plus, our loan specialists could help you navigate the intricacies of franchise financing and structure a solution for your unique needs.
FAQs: Business Loans
How to buy a franchise with no money?
Financing tools, including SBA loans, business term loans, and lines of credit, could help you buy a franchise. However, you’ll likely have to put forth some money from your savings to cover expenses and show lenders that you’re invested in the franchise’s success.
Can a traditional business loan be used to buy a franchise?
Yes, you can use a traditional business loan to buy a franchise. However, some loans may be better suited to certain types of expenses, so it’s important to do your research. For example, the SBA has certain loans that are designed specifically for equipment expenses, not other purchases.
